Deciding when to begin taking your social security retirement benefits can be difficult because there are many factors to consider. Even if you plan to keep working, social security benefits are available to most workers as early as age 62, but you can delay collecting up until age 70 or choose any age in between.
The first step in making your decision is to determine your full retirement age (#FRA)—the age at which you can collect your full benefits. For workers born between 1943 and 1954, the FRA is 66; for those born later, the FRA gradually increases to age 67. Claiming benefits prior to your FRA can reduce your monthly payment by as much as 30 percent—but you will receive benefits for a longer period. If you postpone claiming benefits beyond your FRA, your social security payment will increase by a certain percentage, depending on your year of birth, until you reach age 70.
It’s important to consider your options carefully. The decision to claim benefits early can result in a lower standard of living for the rest of your life. And claiming later can mean more financial security for your surviving spouse.
The benefit reduction incurred by claiming early is permanent. If you elect to start receiving benefits early, your benefits will still be increased annually by cost-of-living allowances. But despite social security’s annual inflation adjustment, your payments may never equal the benefit that you would have received by waiting until your FRA.
What timeline is best for you? You can crunch the numbers using AARP’s Social Security Benefits Calculator, available at www.aarp.org/work/social-security/social-security-benefits-calculator.
Source: Social Security Administration. The chart illustrates how benefits can differ based on the age at which you start receiving social security. It assumes a benefit of $1,000 per month at age 66. Your benefits will be based on your own work history and may differ.
Questions to Ask Yourself
From a purely mathematical point of view, most people are better off waiting to start collecting their social security benefits, but there are questions you need to ask yourself.
Do you need the cash? If you need help paying for basic living expenses, you probably should elect to begin receiving benefits as soon as possible.
How is your health? According to the most recent Social Security Administration (SSA) life expectancy tables, a healthy 65-year-old female’s average life expectancy is 86.6. Further, one out of every four will live past age 90.
In any case, it is important to consider your family’s pattern of longevity. The longer you live, the more you benefit from delaying. If your health and family history predict a long life, you may be better off delaying your benefits until FRA or later.
If you don’t expect to attain a normal life expectancy and you are single, consider taking benefits early. But if you are married, be aware that doing so will reduce your spouse’s survivor benefit.
Will you continue to work? If your working wages are greater than $18,240 in 2020 and you selected early benefits, your (and your dependents’) social security benefits will be reduced by $1 for every $2 you earn. If you earn more than $48,600 in the year you reach your FRA, your benefits will be reduced by $1 for every $3 you earn. After that point, working has no effect on the amount of your benefit, although it may impact whether your benefits are taxed.
Although your benefits will be reduced if your earned income exceeds the threshold, this is a temporary reduction. The SSA will recalculate your benefits at your FRA and credit any months where your earnings from work completely offset your monthly benefit. Further, since your benefit includes your highest 35 years of indexed earnings, wages you earned today may replace lower-earning years in the benefit calculation, which could result in higher benefits.
How much do you earn from pensions and other investments? For retirees earning more than $25,000 ($32,000 for married couples), 50 percent of your social security benefits will be taxed. If you earn more than $34,000 ($44,000 for married couples), 85 percent of your social security benefits will be included in your taxable income. To determine your income for this purpose, the IRS looks at wages, self-employment, interest, dividends, and otherwise tax-free municipal-bond income. The IRS adds all these to one-half of your social security benefit to determine how much of your benefits will be taxed.
Are you in a high tax bracket? Since social security benefits may be taxed, those in the highest tax brackets and with other sources of income can benefit from delaying social security, thus deferring taxes.
Were you or your spouse born in 1953 or earlier? Normally, if both you and your spouse are living, the SSA will pay you the higher of your own social security retirement benefit or 50 percent of your spouse’s benefit. If you were born in 1953 or earlier and delay benefits until your FRA, however, you will have a choice of either benefit.
One strategy would be for the lower-earning spouse to take reduced benefits after age 62 and for the higher-earning spouse to wait to take a spousal benefit at his or her own FRA. Then, at age 70, the latter would switch to a benefit based on his or her own work history. This would allow you to accrue delayed retirement credits and provide a higher benefit. But because the rules are somewhat complicated, consult your local social security office about your eligibility for this strategy.
Are you a surviving spouse? As a widow or widower at FRA, you are eligible for 100 percent of what your spouse’s benefits would have been if he or she were living. Reduced survivor benefits are available at age 60. Taking a reduced survivor benefit does not affect the benefit based on your own earning history. Thus, you can apply for a survivor benefit and switch to your unreduced retirement benefit at your FRA or later.
Will you spend or save your social security benefits? You may be able to earn more on your reinvested payments than you lose by taking a reduced benefit. A tax professional can calculate the after-tax, breakeven interest rate that would be necessary for this strategy to make sense.
Before you can decide when to take your retirement benefits, it’s necessary to check with the SSA to find out which benefits you’re entitled to claim. Verify your earnings history with the SSA’s records and correct any errors. Based on the social security benefit statement and your recent tax records, a tax preparer or financial advisor can run financial models to help you make your decision.
Take your benefits early -- Wait until your FRADelay benefits up to age 70
If you need the cash flow to pay living expenses
If you prefer the flexibility of investing benefits
If you’re not in good health and are single
If you are still working and earning more than $18,240 (2020) If you want to receive the highest spousal benefit availableIf you want to increase your monthly benefit If you are very healthy and have a family history of long life expectancies If you want your spouse to receive the highest survivor benefits
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. © Copyright 2020 Commonwealth Financial Network®. Presented by Sara Romaine. Sara Romaine is a financial advisor at Blue Hills Wealth Management. BHWM is located at 300 Crown Colony Drive, Quincy MA. Sara can be reached at 617-471-6800 or sara@bluehillswm.com. Securities and advisory services offered through Commonwealth Financial Network, Member, FINRA/SIPC a registered investment advisor. Fixed insurance products and services and College Planning services offered by Blue Hills Wealth Management and College Funding Solutions are separate and unrelated to Commonwealth.
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